Shale Pioneer Chesapeake Plans Bankruptcy as Options Dwindle (1)

Chesapeake Energy Corp. is preparing a potential bankruptcy filing that could hand control of one of the leading lights of the U.S. shale revolution to senior lenders, according to people with knowledge of the matter.

The dwindling options for a powerhouse that once rivaled Exxon Mobil Corp. for title of king of American natural gas comes after Chief Executive Officer Doug Lawler’s 7-year effort to untangle the financial and legal legacies of Chesapeake’s late founder, Aubrey McClendon.

Lawler’s denouement, in turn, would signal the deep peril facing a shale industry largely built according to McClendon’s blueprint for Chesapeake: amassing incredible debts to pursue aggressive drilling programs that ultimately unearthed too little treasure to reward investors.

Gordon Pennoyer, a spokesman for Chesapeake, declined to comment. The talks with lenders come almost seven years to the date that Lawler assumed the helm at the Oklahoma City-based company at the behest of Carl Icahn and O. Mason Hawkins, at the time two of the driller’s biggest investors.

Chesapeake is negotiating a restructuring support agreement that could see holders of its so-called FILO term loan take a majority of the equity in bankruptcy, said the people, who asked not to be identified discussing confidential matters. The support agreement remains fluid and the terms could change, the people said.

Chesapeake, which owes about $9 billion, is debating whether to skip interest payments due on June 15 and invoke a grace period while it talks with creditors, the people said. No final decision has been made. The company has also begun soliciting lenders to provide debtor-in-possession financing to fund its operations during bankruptcy, according to one of the people.

Ripple Effects

A bankruptcy filing by Chesapeake would reverberate well beyond its investors and employees because it will put millions of dollars in pipeline, fracking and other contracts at risk.

The company avoided delisting from the New York Stock Exchange earlier this year by resuscitating its ailing share price through a 1-for-200 reverse stock split. On Monday, the shares more than tripled at one point to $84.75, then plunged after Bloomberg reported the potential Chapter 11 filing.

The rout continued in pre-market trading Tuesday, and was halted for more than three hours after circuit-breakers were triggered. The stock dropped as much as 74% upon resumption, only to spark another trading halt. A bankruptcy typically wipes out existing shareholders.

Chesapeake, the brainchild of McClendon and co-founder Tom Ward, was one of the first to aggressively combine breakthroughs in horizontal drilling and high-intensity hydraulic fracturing to shale rock long ignored by geologists looking for gas or oil.

That gamble provided trailblazers like Chesapeake, Continental Resources Inc. and EOG Resources Inc. a head start over industry titans like Exxon and Chevron Corp. in dominating the burgeoning shale sector. Years later, companies like Exxon would pay dearly to gain footholds in shale.

Lawler’s efforts to rescue Chesapeake have included across-the-board belt-tightening at the company’s once-lavish corporate headquarters, along with tens of thousands of job cuts. A years-long campaign to transform the gas giant into an oil company never gained traction.

Pre-Covid

The driller recorded $8.5 billion in impairments for the first three months of the year as the value of its fields, a sand mine and other assets plunged along with commodity prices.

Chesapeake was already in a precarious position before the Covid-19 outbreak sent crude demand plummeting. At its height more than a decade ago, the producer was a $37.5 billion juggernaut commanded by McClendon, an outspoken advocate for the gas industry. But Chesapeake’s success at extracting the fuel from deeply buried rock contributed to a massive gas glut.

Kirkland & Ellis and Rothschild & Co. are advising Chesapeake, according to people with knowledge of the matter. The FILO lenders are organized with Davis Polk & Wardwell and Perella Weinberg Partners LP, the people said. Franklin Resources Inc. is organized with Akin, Gump, Strauss, Hauer & Feld LLP, according to one of the people.

Representatives for Rothschild, Perella Weinberg and Franklin declined to comment, while representatives for Kirkland & Ellis, Davis Polk, and Akin Gump didn’t immediately comment.

(Updates share price in ninth paragraph)

--With assistance from Joe Carroll.

To contact the reporters on this story:
Allison McNeely in New York at amcneely@bloomberg.net;
Katherine Doherty in New York at kdoherty23@bloomberg.net;
David Wethe in Houston at dwethe@bloomberg.net

To contact the editors responsible for this story:
Rick Green at rgreen18@bloomberg.net;
Adam Cataldo at acataldo@bloomberg.net;
Simon Casey at scasey4@bloomberg.net

Joe Carroll, Carlos Caminada

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